Gas prices would be $4.00 per gallon without ethanol

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Based upon current market conditions and federal renewable fuels policy, 10 percent ethanol blends (E10) are keeping gasoline prices $0.12 per gallon cheaper than they otherwise would be.

As AAA reports, the current average price for gasoline is $3.88 per gallon nationwide. Without ethanol, gas prices would average $4.00 per gallon nationally.

These savings do not take into account the downward pressure ethanol puts on the oil market by virtue of being 10 percent of the nation’s gasoline supply. Previous estimates of that impact show ethanol is keeping gasoline prices up to $0.60 lower per gallon than they otherwise would be.

Renewable Fuels Association Vice President of Research and Analysis Geoff Cooper has taken a snapshot look at ethanol and gasoline prices as they closed recently. The key points of his analysis include:

April 27, 2011 closing prices for May futures had RBOB gasoline (the base gasoline used across the country) at $3.45 per gallon and ethanol at $2.64 per gallon – a difference of $0.81 per gallon. Over the past several weeks, ethanol has generally been priced $0.60 to 0.80 per gallon below gasoline and the spread has averaged about $0.40 per gallon since the beginning of the year.

Based purely on the current $0.81 per gallon differential between gasoline and ethanol prices, drivers should be seeing E10 (10 percent ethanol/90 percent gasoline) blends priced 8 cents per gallon less than regular unleaded. Don’t forget that blenders are still receiving the $0.45 per gallon tax credit for every gallon of ethanol they blend with gasoline, which equates to another 4.5 cents per gallon for E10. Under the current dynamics, most—if not all—of the value of the tax credit should be making its way to the consumer.

When both the current price differential between gasoline and ethanol and the blender’s credit are considered, E10 should be about 12 cents per gallon less than regular unleaded at the pump. That’s an annual savings of more than $100.00 for the average American household, which consumes about 900 gallons of gasoline yearly.

If E15 blends were widely available today (EPA approved the use of E15 for cars, pickups and SUVs from model year 2001 and newer early this year), drivers of the approved vehicles would see E15 priced 19 cents per gallon less than regular unleaded.

It is important to recognize that these figures are based only on the current price spread and tax credit. Ethanol also affects gasoline prices in the aggregate by substantially adding to the fuel supply. This effect grows as the supply of ethanol increases. Several economists have estimated that the ability of ethanol to extend fuel supplies, coupled with ethanol’s relative discount to gasoline, means gasoline is 40 to 60 cents per gallon less than it would be without ethanol. The impact may be even larger than that in cases where oil prices are extremely high, as is the case today.